The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes

78 Pages Posted: 4 Mar 2019 Last revised: 14 Jan 2021

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University - PBC School of Finance

Zhiguo He

University of Chicago - Finance

Chun Liu

University of Toronto; Tsinghua University - School of Economics and Management

Multiple version iconThere are 3 versions of this paper

Date Written: August 26, 2019

Abstract

The upsurge of shadow banking is typically driven by rising financing demand from certain real sectors. In China, the four-trillion-yuan stimulus package in 2009 was behind the rapid growth of shadow banking after 2012, expediting the development of Chinese corporate bond markets in the post-stimulus period. Chinese local governments financed the stimulus through bank loans in 2009, and then resorted to non-bank debt financing after 2012 when faced with rollover pressure from bank debt coming due. Cross-sectionally, using a political-economy-based instrument, we show that provinces with greater bank loan growth in 2009 experienced more municipal corporate bond issuance during 2012–2015, together with more shadow banking activities including Trust loans and wealth management products. China's post-stimulus experience exhibits similarities to financial market development during the U.S. National Banking Era.

Keywords: Keywords: Local Government Financing Vehicles, Municipal Corporate Bonds, Political Cycle, Shadow Banking in China, Railroad Finance, Trust Companies

JEL Classification: E61, G21, H72, O17

Suggested Citation

Chen, Zhuo and He, Zhiguo and Liu, Chun and Liu, Chun, The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes (August 26, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-29, PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3345331 or http://dx.doi.org/10.2139/ssrn.3345331

Zhuo Chen

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing, Beijing 100083
China

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Chun Liu

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
175
Abstract Views
1,038
rank
37,321
PlumX Metrics